Consider the following model of the IS curve without an international sector:
Consumption: $C _ { t } = \bar { a } _ { c } \bar { Y } _ { t };$
Investment: $I _ { t } = a _ { i } \bar { Y } _ { t };$
Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { Y } _ { t }$
.
With this formulation, the IS curve is horizontal.

Question

Consider the following model of the IS curve without an international sector:
Consumption: $C _ { t } = \bar { a } _ { c } \bar { Y } _ { t };$ 
Investment: $I _ { t } = a _ { i } \bar { Y } _ { t };$ 
Government expenditure: $G _ { t } = \bar { a } _ { g } \bar { Y } _ { t }$ 
.
With this formulation, the IS curve is horizontal.

Quizplus · Accepted Answer

The IS curve represents equilibrium in the goods market, and its slope depends on the responsiveness of investment and consumption to changes in income and interest rates. A horizontal IS curve would imply that changes in interest rates have no effect on output, which is not the case in this model.

Consider the Following Model of the IS Curve Without an International